Reverse mortgages on the upswing

More homeowners taking advantage of this cash option

Author: By Jennifer Warren
Posted: Monday, December 29, 2008

When she found herself sinking under $100,000 in nursing home bills after her husband’s death a few years ago, 69-year-old Laura Todera of Goshen knew she was in trouble. She needed a quick solution to erase the nagging medical debt. She found the answer in the form of a Reverse Mortgage.

The increasingly popular federally insured private loan option allows homeowners over the age of 62 to take a loan against their existing home loan. Recipients do not have to repay the loan until their home is sold or no longer used as a main residence, although the value of the home must be maintained. In turn, it allows the homeowner to convert a portion of often long-built-up equity directly to cash.

In Todera’s case, a Reverse Mortgage was a lifesaver. “My Reverse Mortgage allowed me to pay off all of those hospital bills and even have some cash left over,” explains Todera. “I would definitely recommend it, as I already have to many of my friends; it allows them to stay in their home if they are pressed for money and don’t want to ask others, like their children, for help.” Reverse Mortgages are experiencing an unprecedented boom as hard economic times continue.

Homeowners are searching for ways to hold on to the savings they have worked so long to accumulate. According to the United States Department of Housing and Urban Development (HUD), there was a 41 percent increase in Reverse Mortgages from September 2006 to September 2007. For 71-year-old Goshen resident David Warren, the sharp rise is a reflection of the times.

“When I took out a Reverse Mortgage in 2005, it wasn’t that popular at all,” says Warren. “However, it has been getting more and more popular, especially now with the economy so bad and the banks reluctant to lend out money, so you may as well try to get it from your house if you can.”But with home values on the decline, are homeowners able to get as much money from a Reverse Mortgage as they used to?

According to Darryl Hicks, vice president of communications of the National Reverse Mortgage Lenders Association, the answer is yes ... and no. “The decline is not necessarily having a negative effect,” says Hicks. “You can’t get as much equity as you could a year ago, but interest rates are very low right now you can actually get more money [from a Reverse Mortgage].”

Because the amount of money a homeowner receives from a Reverse Mortgage depends, in part, on current interest rates (in addition to the homeowner’s age and the value of the home), homeowners should be aware that as mortgage rates go up, so will the interest rate at which the loan is accruing. While this won’t affect the amount of income you receive from the mortgage, it will increase the amount of money that must be paid back when the home is sold, you move out or upon your death.

Brian Mathews, vice president of residential lending at Ulster Savings Bank, agrees that Reverse Mortgages are not falling victim to the economic times. “The number of loans has dramatically increased this year, which points to not only a better understanding and acceptance of the product, but also the need for it.”

Who benefits most from a Reverse Mortgage?
A Reverse Mortgage is ideal for those, like Todera and Warren, who know they want to remain in their home. Applicants must be at least 62 years old and own the home in which they are living (or have a low mortgage balance that can be paid off at the closing with the proceeds). Those who benefit most from this specialized loan are often in some way financially pressed, whether it is the result of limited work, growing bills or medical issues.

Even if the prospective applicant has worked his or her entire life and has a decent pension, the Reverse Mortgage still might be the best way to go. It was for David Warren three years ago. “Having a 50-year-old house that I knew was going to need a lot of repairs, and knowing there was a certain level of entertainment I wanted to have access to in my life, I got the Reverse Mortgage as a safety valve,” says Warren.

“It also allowed me to maintain the lifestyle I had when I was working, helping me to get about 75 percent of what I was earning when I was working and giving me a much needed peace of mind.” For 25 years Warren was a security hospital treatment assistant at Mid-Hudson Psychiatric Center in Middletown, retiring in January 2005. Active during his working years, Warren wanted to continue his regular habits of going out to dinner, seeing movies and plays, and traveling.

The money received from a Reverse Mortgage allows homeowners like Warren to pay off bills, fix up the house or take a trip. Monies accrued from the mortgage can also simply supplement Social Security or a pension. The amount borrowed depends upon the borrower’s age, the current interest rate, the appraised value of the home and the FHA (Federal Housing Administration) mortgage limits in the area.

Homeowners don’t need to worry about foreclosure or eviction for missed payments, either – they can remain in the home. “A lot of borrowers simply just can’t make the payments anymore,” says Marie Byrne, owner of Washingtonville’s Sapphire Title and Settlement, which conducts title searches for Reverse Mortgages. “At the same time, they really want to remain in the place that is oftentimes their main investment.”

The Reverse Mortgage is not problem-free, however. Applicants need to consider the large amount of accrued interest on the loan and ensuing payoff should moving become necessary. “Often, the question is do you want to be strapped by your current financial situation, just getting by, or do you want to take equity out of what you have accumulated and make a better life for yourself,” asks Byrne.

Because choosing a Reverse Mortgage is such a complex and individual decision, it is best that the homeowner have some help sorting through the details. The federal government requires that homeowners receive mandatory counseling prior to signing any papers. “We have strict rules on counseling,” says Brian Mathews of Ulster Savings Bank.

“A potential borrower needs third party counseling and they go through extensive discussions to determine if this is the right product for them. It’s an interesting time of tumult and people are questioning the credibility of any financial product, but we take great care in making sure it’s the right thing to do.”
A lawyer can also be a key player in the process, helping translate some of the legal jargon and clarifying client’s rights.

Jennifer Warren is a freelance writer living in Orange County.

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